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Californians Learning How to Succeed in Personal Finances

Burdened by Student Loans, He Weighs Career, Financial Trade-Offs

August 08, 2000|LIZ PULLIAM WESTON | TIMES STAFF WRITER

Mark Olsen, 33, borrowed so much money to attend graduate school that he now must work in an unrelated field just to make the loan payments.

This is not the future Olsen had planned when he was accepted at USC's film school in 1995. He graduated last year with more than $80,000 in student debt and no clear idea how he was going to pay it back.

"There tends to be self-delusion in film school. You think you're going to be the next hot thing and that money won't matter," said Olsen, who works as a marketing communications consultant in Los Angeles, making $71,000 a year. "Then you join the real world and realize you have to struggle like everyone else."

Olsen now appears to be straddling two worlds with two highly disparate visions for his future. On the one hand, he wants to pursue the screenwriting career for which he studied. On the other, he wants the trappings of a more stable life, including holding a steady, good-paying job, buying his own home and saving for retirement. He'd also like to pay off his student debt "sometime before my own kids are in college," said Olsen, who is currently single and childless.

Temecula, Calif., financial planner Karin E. McKerahan said Olsen is actually on track to achieve most of his goals. But he must strike a better balance between his short-term and long-term desires.

"If he wants to accelerate his student loan repayment and save for a new car, he must choose to spend less now and redirect some of his savings from retirement funds to short-term savings," McKerahan said. "And if he would like to pursue his dream of screenwriting . . . it would be wise to delay the purchase of a home to retain his flexibility and to keep his fixed monthly expenses low."

To find out what was most important to him, McKerahan asked Olsen to describe his ideal vision of what he would like his life to be like in five to 10 years. Olsen saw himself as a screenwriter and a family man with his own home.

Olsen has known some success in the writing field. One of his plays was published and has been performed several times. Just being accepted to the USC graduate school was an achievement, because admission is quite competitive.

"There was never any question. Once I was accepted, I was going to go, because it's so hard to get in," Olsen said.

In matching fantasy with reality, however, Olsen realized he was not willing to leave his job and take the financial risks of trying to be a screenwriter full-time with no guaranteed income or retirement plan.

Buying a home would further tie him down, McKerahan warned. Olsen currently rents a Manhattan Beach home with two roommates, paying $500 a month in rent. Olsen would have to make much higher monthly payments to purchase a similar home, particularly because he has no money saved for a down payment.

McKerahan also tried to dampen Olsen's enthusiasm for paying off his student loans early. It's true that Olsen could save about $50,000 and shave 13 years off his loan repayment schedule by making extra payments of $200 a month. But his consolidation loan, which stretches his payments over 30 years, is fixed at 7.6%, which makes the loan relatively inexpensive, McKerahan said.

"Mark should be able to earn more by investing his money instead of reducing this loan over the long term," McKerahan said.

In fact, Olsen needs to inject more financial flexibility in his life, the planner said. Olsen saves more than 17% of his income, pumping the maximum 15% his employer allows into a 401(k) and contributing $2,000 to a Roth IRA. At the same time, he has little money saved for emergencies.

Olsen said he wants to catch up with his retirement savings, because he spent so much time in school rather than earning money. In addition to his USC degree, he has a graduate degree in playwriting from a university in Britain.

He is also reluctant to have money sitting in a low-interest account, rather than working for him in the stock market.

But an emergency fund equal to at least three months' expenses is designed to help people deal with inevitable financial setbacks--a job loss, a natural disaster or a big car repair.

"And these things never happen alone. It's usually two or three things happening all in a row," McKerahan said. "An emergency fund means you don't have to go into debt on credit cards or declare bankruptcy if a financial crisis occurs."

Olsen got a real-life demonstration of McKerahan's point just a few days after meeting with her. His grandmother died, forcing him to buy a last-minute plane ticket for her funeral. Then, on his way to the airport, he received a $300 speeding ticket. He also learned that his current contracting job may end in four to six weeks, which will require looking for a new job.

McKerahan recommended Olsen look for ways to reduce his expenses and, if he is unable to cut back, to reduce his 401(k) contributions temporarily and divert the extra money to savings. He should also try to save a down payment for a car to replace his aging 1990 Mustang, she said.

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